United Group
H1 2019 HIGH YIELD BONDHOLDER REPORT
27 August 2019
H1 2019 HIGH YIELD REPORT
CONTENTS Page
H1 2019 Summary ...... 3 Key Operating Measures ...... 6 Results of Operations ...... 10 Liquidity and Capital Resources ...... 16 Subsequent (Material Recent) Events ...... 20 Mergers & Acquisitions ...... 21 Group Background ...... 22 Appendices ...... 25 Appendix 1 - Financial statements ...... 25 Appendix 2 - Key Factors Affecting Our Business and Results of Operations ...... 28 Appendix 3 - Definitions of Key Operating Measures ...... 37 Appendix 4 - Description of Key Line Items ...... 39 Appendix 5 - Quantitative and Qualitative Disclosures about Market Risk ...... 41 Appendix 6 - Critical Accounting Policies ...... 42
H1 2019 HIGH YIELD REPORT
Disclaimer
THIS REPORT (THIS “REPORT”) IS NOT AN OFFER OR SOLICITATION OF AN OFFER TO BUY OR SELL SECURITIES. IT IS SOLELY FOR INFORMATION PURPOSES. BY READING THIS REPORT, ATTENDING A PRESENTATION OF THIS REPORT (THE “PRESENTATION”) AND/OR READING THE SLIDES USED FOR THE PRESENTATION (THE “PRESENTATION SLIDES”) YOU AGREE TO BE BOUND AS FOLLOWS:
This Report, the Presentation and/or the Presentation slides contains forward-looking statements, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or including the words “targets”, “believes”, “expects”, “aims”, “intends”, “may”, “anticipates”, “estimates”, “would”, “will”, “could”, “should” or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond our control that could cause our actual performance or achievements to be materially different from future performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding our present and future strategies and the environment in which we will operate in the future. These forward-looking statements speak only as at the date of this Report. We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any of such statements are based.
This Report contains summary unaudited condensed financial information for Adria Midco B.V. and its subsidiaries for the six months ended June 30, 2019, unless another source, such as management accounts, is specifically mentioned. The statement of financial position for Adria Midco B.V. and its subsidiaries as at 30 June 2019 and as at 30 June 2018, as well as the condensed consolidated interim statements of profit or loss and cash flows for Adria Midco B.V. and its subsidiaries for the six month periods then ended have been prepared in accordance with IFRS, but have not been reviewed by our independent auditors. As a consequence, the summary condensed financial information presented is subject to potential change. If in connection with any review there is any material change to such summary condensed financial information, we intend to present a supplemental report detailing such change.
Certain financial measures and ratios related thereto in this Report including EBITDA, Adjusted EBITDA, Adjusted EBITDA minus capital expenditure, RGUs and ARPU (collectively, the ‘‘Non-IFRS Measures’’) are not specifically defined under IFRS or any other generally accepted accounting principles. These measures are presented here because we believe that they and similar measures are widely used in our industry as a means of evaluating a company’s operating performance and financing structure. Our management believes this information, along with comparable IFRS measures, is useful to investors because it provides a basis for measuring the operating performance in the periods presented. These measures are used in the internal management of our business, along with the most directly comparable IFRS financial measures, in evaluating the operating performance. These measures may not be comparable to other similarly titled measures of other companies and are not measurements under IFRS or other generally accepted accounting principles, and you should not consider such items as alternatives to net income (loss), operating income or any other performance measures derived in accordance with IFRS, and they may be different from similarly titled measures used by other companies.
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H1 2019 Summary
27 August 2019 – United Group, the leading cable and media player in South Eastern Europe, today reports its financial results for H1 2019.
Operational Highlights Homes passed grew by 1% to 1,829 thousand compared to H1 2018, primarily as a result of network expansion Number of unique cable subscribers increased to 1,166 thousand (H1 2018: 1,147) RGUs1 up by 5% year-on-year to 3,844 thousand, driven by organic growth Blended cable ARPU for H1 2019 up by 3% year-on-year to €22.6 (H1 2018: €21.8), driven by migration from lower-priced to higher-priced service packages, growth in subscribers for the multi-play offering, and price increases in Serbia, Slovenia and Bosnia & Herzegovina
Financial Highlights Consolidated Group revenue for H1 2019 up 28% year-on-year to €363.9 million (H1 2018: €285.4 million) Consolidated Group adjusted EBITDA up by 19%2 in H1 2019 to €150.1 million (H1 2018: €126.7 million) Net cash outflow of €10.0 million against an inflow of €194.1 million in H1 2018 Net leverage (ratio of Group Net Debt to Annualised Last Two Quarters Adjusted Pro Forma EBITDA3) as at June 30, 2019 decreased to 4.64x (4.67x as at March 31, 2019)
1 2018 restated – OTT users on our network reclassified to Cable and Cable services users on other networks reclassified to Other Services from Cable. This change has an immaterial effect on subscriber, RGU, ARPU and churn data for 2018. Operational figures for 2018 have been restated in line with the new approach.
2 Year-on-year comparison affected by positive effect of acquisitions realized during 2018, as well as changes in FX rates.
3 Annualized Adjusted Pro Forma EBITDA is calculated as two times Q1 2019 + Q2 2019 Adjusted EBITDA plus €4.2 million of expected synergies with Nova Croatia and €12.4 million of expected synergies with DM & PINK.
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The following summary describes the operations in each of our reportable segments or subgroups: SBB Serbia includes the results of cable services in Serbia and direct-to-home (“DTH” or Satellite) operations in Serbia and North Macedonia. Absolut Solutions results are also included in the SBB Serbia segment, however their results are not reflected in the statutory consolidated results of the SBB Serbia Group. Telemach Slovenia includes the results of our cable and mobile services in Slovenia and DTH operations in Slovenia. Telemach BH includes the results of our cable and DTH services in Bosnia and Herzegovina. Telemach Montenegro includes the results of our cable and DTH services in Montenegro. United Media Group includes the results of our media and content business in the former Yugoslav region including the results of N1, Sport Klub, Grand Production, Orlando Kids, IDJ and entities acquired during 2018 (Nova TV and Direct Media Group). Other Businesses includes the results of our other operating businesses (such as NetTV) and our Holding companies.
United Group generated consolidated revenues of €363.9 million during H1 2019. The 28% increase in revenue resulted primarily from organic growth of our subscriber base, migration of subscribers to multi-play packages and the impact of acquisitions in 2018. Adjusted EBITDA increased by €23.5 million, or 19%, year-on-year to €150.1 million for H1 2019.
Summary financials table in € m H1 2018 H1 2019 Change
Revenue 285.4 363.9 28% Adjusted EBITDA 126.7 150.1 19% Result from operating activities 39.3 33.1 (16%) Profit before tax 9.7 (7.4) (177%)
In H1 2019: SBB Serbia generated 30% of consolidated revenues and 39% of consolidated Adjusted EBITDA Telemach Slovenia generated 31% of consolidated revenues and 24% of consolidated Adjusted EBITDA Telemach BiH generated 10% of consolidated revenues and 9% of consolidated Adjusted EBITDA Telemach MNE generated 2% of consolidated revenues and 1% of consolidated Adjusted EBITDA United Media segment generated 25% of consolidated revenue and 28% of consolidated Adjusted EBITDA
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Other Businesses generated 2% of consolidated revenue and (1%) of consolidated Adjusted EBITDA
Adj. H1 2019 in € m Revenue, net % of total % of total EBITDA
SBB Serbia Segment 109.0 30% 57.8 39% Telemach Slo Segment 112.0 31% 36.4 24% Telemach BH Segment 35.9 10% 13.0 9% Telemach MNE Segment 7.2 2% 1.9 1% United Media Segment 91.6 25% 42.4 28% Other Businesses 8.3 2% (1.4) (1%) Total 363.9 100% 150.1 100%
As of June 30, 2019, United Group had 3.84 million RGUs, up 5% versus the same period last year (H1 2018: 3.67 million) and up 22.6 thousand quarter-on-quarter (Q1 2019: 3.82 million). This positive trend was driven by organic growth of cable pay-TV, telephony, mobile, internet and other services, as well as the growing proportion of multi-play subscribers. Blended cable average revenue per user (“ARPU”) for the period was €22.6 compared to €21.8 for H1 2018, with the 3% year-on-year increase primarily driven by migration of existing subscribers from lower-priced to higher-priced service packages, growth in subscribers for the multi-play offering, and price increases in Serbia, Slovenia and Bosnia & Herzegovina. Subscriber migration to multi-play packages is expected to continue as the cable market develops further. Capital expenditure (including capitalized inventory) amounted to €92.5 million in H1 2019, compared to €86.4 million in H1 2018. The majority of investments during this period were related to network expansion, customer premise equipment, purchase of new programming rights, IP equipment and investments in mobile infrastructure.
United Group’s six-month financial statements have been prepared in accordance with International Financial Reporting Standard (“IFRS”) Accounting Policies.
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Key Operating Measures
United Group uses several key operating measures, including homes passed, unique cable subscribers, RGUs and ARPU, to track the performance of the business. None of these terms are measures of financial performance under IFRS, nor have these measures been reviewed by an outside auditor, consultant or expert. These measures are derived from management information systems. As these terms are defined by our management, they may not be comparable to similar terms used by other companies. Please refer to Appendix 3 for definitions of our key operating measures.
Unique Cable Subscribers, RGUs and ARPU
The following table sets forth key operating measures for United Group as of and for the six months ended June 30, 2019 and June 30, 2018. in 000 H1 2018 H1 2019 Delta % Delta Key Operating Measures
Homes passed 1,809 1,829 1% 20 Unique cable subscribers 1,147 1,166 2% 19 RGUs 3,671 3,844 5% 173 Cable pay-TV 1,147 1,166 2% 19 Broadband internet 792 834 5% 42 Fixed -line telephony 603 671 11% 67 Mobile services 483 532 10% 49 DTH pay-TV 470 452 -4% (17) OTT 123 118 -4% (5) Other services 52 71 36% 19 Penetration Cable television 63.4% 63.7% 1% 0% Broadband internet 43.8% 45.6% 4% 2% Fixed-line telephony 33.4% 36.7% 10% 3% Blended Cable ARPU (in €) 21.8 22.6 3% 0.7
Homes passed increased by 20 thousand, or 1%, from 1,809 thousand as of June 30, 2018 to 1,829 thousand as of June 30, 2019, primarily due to organic network expansion.
As of June 30, 2019, we had 1,166 thousand cable pay-TV RGUs, an increase of 19 thousand compared to 1,147 thousand as of June 30, 2018, resulting from organic growth.
The total number of DTH pay-TV RGUs amounted to 452 thousand as of June 30, 2019, a 4% decrease year-on-year.
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As at June 30, 2019, we had 834 thousand broadband internet RGUs, representing an increase of 5%, compared to 792 thousand at June 30, 2018. This is primarily attributable to an increase in multi-play subscriptions over this period and organic subscriber growth.
The total number of fixed telephony RGUs rose to 671 thousand as at June 30, 2019, an increase of 11% compared to 603 thousand at June 30, 2018. The positive trend is primarily due to an increase in multi-play subscriptions over this period and organic subscriber growth. Our fixed-line telephony RGUs as of June 30, 2018 have been restated due to reclassification of fixed-line telephony RGUs outside our network footprint to Other Services. This has resulted in a decline of 12 thousands RGUs, from 616 thousand to 603 thousand. This is mainly due to reclassifications at Telemach Slovenia, affecting 11 thousand fixed-line telephony RGUs.
Our OTT RGUs fell by 4% to 118 thousand, compared to 123 thousand as of June 30, 2018. This figure includes 11 thousand OTT RGUs in Serbia and Slovenia.
Our mobile service RGUs increased from 483 thousand as of June 30, 2018 to 532 thousand as of June 30, 2019. This is an increase of 49 thousand, or 10%, driven by organic growth in Slovenia.
Our total RGUs increased by 5%, from 3,671 thousand as at June 30, 2018 to 3,844 thousand as of June 30, 2019. RGUs added over this period were a result of organic growth of cable pay-TV and mobile service, as well as the growing proportion of multi-play subscribers.
The following table provides a breakdown of our key operating measures for SBB Serbia, Telemach Slovenia, Telemach BH and Telemach MNE.
Telemach Telemach Telemach in 000 SBB Serbia Slovenia BH MNE H1 H1 H1 H1 H1 H1 H1 H1 Footprint 2018 2019 YoY 2018 2019 YoY 2018 2019 YoY 2018 2019 YoY
Homes passed 1,067 1,075 1% 334 334 0% 330 335 1% 77 86 10% Unique cable 703 725 3% 199 196 (1%) 216 215 0% 28 30 4% subscribers 66% 67% 60% 59% 65% 64% 37% 35% RGUs Cable pay-TV 703 725 3% 199 196 (1%) 216 215 0% 28 30 4% Broadband internet 461 495 7% 158 159 1% 154 159 3% 19 21 11% Telephony 325 382 18% 168 169 0% 100 105 6% 11 14 29% Mobile services - - - 483 532 10% ------DTH pay-TV 231 223 (3%) 44 44 0% 133 132 (1%) 62 54 (13%) OTT 11 11 1% - 0 ------Other services 22 32 40% 28 38 37% 2 1 (34 %) - - - Total RGUs 1,752 1,867 7% 1,081 1,139 5% 605 612 1% 120 118 (1%)
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The following table sets forth the blended cable ARPU for SBB Serbia, Telemach Slovenia, Telemach BH and Telemach MNE generated by the products and services we offer.
SBB Serbia Telemach Slo Telemach BH Telemach MNE H1 H1 H1 H1 H1 H1 H1 H1 in € 2018 2019 2018 2019 2018 2019 2018 2019 ARPU
Cable pay-TV 10.3 10.5 18.7 19.1 9.5 10.3 11.1 11.2 Broadband internet 10.2 10.5 17.7 18.3 9.5 9.8 8.2 8.2 Telephony 4.2 3.6 3.6 3.2 7.5 6.9 3.3 2.8 Mobile services4 10.2 10.8 Blended Cable ARPU 18.8 19.4 35.7 36.6 19.5 20.8 17.4 18.1
DTH pay-TV4 9.6 10.7 17.5 18.3 8.4 9.3 10.6 12.0
ARPU from broadband internet includes value-added services such as online backup, internet security and anti-virus solutions. One unique cable subscriber can be an RGU for cable pay-TV, fixed-line telephony, broadband internet or other services. DTH subscribers are DTH RGUs. SBB Serbia: Blended cable ARPU for SBB Serbia in H1 2019 amounted to €19.4. The 3.5% year-on-year increase was primarily a result of the continued positive impact of subscribers upgrading to multi-play packages and price increases in January 2019. DTH ARPU at SBB Serbia increased to €10.7 in H1 2019, from €9.6 in H1 2018, as a result of a price increase in August 2018. Telemach Slovenia: Blended cable ARPU for Telemach Slovenia in H1 2019 amounted to €36.6. The 2.5% year-on-year increase in blended cable ARPU per customer was driven by growth in the share of our multi-play subscribers. The price increase, effective as of February 2019, had a positive impact on service revenues. The segment’s mobile ARPU for H1 2019 amounted to €10.8, representing the 5.3% year-on-year growth. DTH ARPU at Telemach Slovenia increased to €18.3 in H1 2019, from €17.5 in H1 2018, as a result of a price increase in February 2019. Telemach BH: Blended cable ARPU for Telemach BH in H1 2019 increased by 6.5% year-on-year to €20.8 as a result of growth in the number of subscribers for our multi-play offering and the effect of the price increase implemented in April 2019. DTH ARPU at Telemach Bosnia increased to €9.3 in H1 2019, from €8.4 in H1 2018, as a result of a price increase in January 2019.
4 Please note that Mobile and DTH ARPU did not include IFRS 15 effect in Bondholder report for Q1 2019 for Q1 2018 and Q1 2019 periods.
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Telemach MNE: Blended cable ARPU for Telemach MNE in H1 2019 increased by 3.7% year-on-year to €18.1, mainly as a result of growth in the number of subscribers for our multi-play offering. DTH ARPU at Telemach MNE increased to €12.0 in H1 2019, from €10.6 in H1 2018, as a result of a price increase in January 2019.
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Results of Operations
In this report, we present financial data for United Group for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Please refer to Appendix 2 for the key factors affecting our business and results of operations. For a description of the key line items, please refer to Appendix 4. in €000 H1 2018 H1 2019
Revenue 285,412 363,946 Other income 8,526 5,092 Content cost (44,954) (60,762) Satellite capacity cost (2,509) - Link and interconnection cost (20,397) (19,673) Materials cost (20,538) (22,217) Staff costs (36,170) (52,491) Media buying - (19,097) Other operating expenses (48,010) (56,709) Impairment loss on trade and other receivables, inc. (5,258) (4,458) contract assets Impairment loss on other financial assets - (17)
IFRS EBITDA 116,102 133,614
Depreciation (46,060) (51,083) Depreciation (right-of-use assets) - (8,990) Amortisation of intangible assets (30,755) (40,449) Results from operating activities 39,287 33,092
Finance income 4,569 2,189 Finance costs (34,183) (42,713) Net finance costs (29,614) (40,524)
Profit/(loss) before tax 9,673 (7,432)
Income tax (expenses)/benefit 102 (3,578) Minority share - - Profit/(Loss) for the period 9,775 (11,010)
Revenue
Revenue increased by €78.5 million, or 28%, year-on-year to €363.9 million for H1 2019. This increase was primarily due to growth in the number of our subscribers, an increase in blended cable ARPU due to price increases and successful cross-selling, and the improved performance of companies acquired in 2018.
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Revenue figures for the business segments below exclude inter-company transactions, which have been eliminated. in € m H1 2018 H1 2019 Change
SBB Serbia 100,884 109,005 8.0% Telemach Slovenia 108,087 111,969 3.6% Telemach BiH 33,056 35,879 8.5% Telemach MNE 6,730 7,198 7.0% United Media 28,405 91,567 222.4% Other 8,250 8,328 0.9% Total 285,412 363,946 28%
SBB Serbia: Revenue for our SBB Serbia segment increased by 8.0% year-on-year to €109,005 thousand in H1 2019, primarily due to growth in the number of subscribers and RGUs (particularly through successful cross-selling) and the implementation of a price increase in January 2019.
Telemach Slovenia: Revenue for our Telemach Slovenia segment increased by 3.6% year-on-year to €111,969 thousand in H1 2019, primarily due to an increased number of subscribers in mobile telephony, higher mobile handsets sales and price increases in February 2019.
Telemach BH: Revenue for our Telemach BH segment increased by 8.5% to €35,879 thousand in H1 2019, primarily due to organic growth, as well as an increase in the number of subscribers for our multi-play offering (digital TV, broadband internet and fixed-line telephony) and price increases.
Telemach MNE: Revenue for our Telemach MNE segment increased by 7.0% year-on- year to €7,198 thousand in H1 2019 from €6,730 thousand in H1 2018 due to an increase in the number of multi-play subscribers and organic growth.
United Media Group: External revenue at United Media Group increased by 222.4% year-on-year to €91,567 thousand in H1 2019, primarily due to acquisitions (NOVA TV and Direct Media/Pink) and organic growth. Total revenues of the Media Segment (including IC) grew by 103.1% to €137,892 thousand.
Other Businesses: Revenue for our Other Businesses segment remained stable at €8,328 thousand in H1 2019 compared to H1 2018 (an increase of €78 thousand or 0.9%).
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Other income
Other income decreased from €8,526 thousand in H1 2018 to €5,092 thousand in H1 2019, primarily due to the divestment of Totalna TV Croatia in Q1 2018.
Content cost
Content cost increased by 35% year-on-year to €60,762 thousand in H1 2019, from €44,954 thousand in H1 2018. This increase was primarily due to United Media’s acquisitions of TV channels (Nova TV in Croatia, Bosnia & Herzegovina and Montenegro) and increased sports rights costs.
Satellite capacity cost
No satellite capacity cost is reported in H1 2019 as this cost was capitalized in accordance with IFRS 16.
Link and interconnection cost
Link and interconnection cost decreased by 4% year-on-year to €19,673 thousand in H1 2019, from €20,397 thousand in H1 2018. This decrease was primarily due to lower telephony traffic costs.
Materials cost
Materials cost increased by 8% year-on-year to €22,217 thousand in H1 2019, from €20,538 thousand in H1 2018. This increase was primarily due to the higher cost of sales for mobile handsets as a result of increased sales volumes and higher energy costs due to price increases.
Staff costs
Staff costs increased by 45% year-on-year to €52,491 thousand in H1 2019, from €36,170 thousand in H1 2018. Of total staff costs, in H1 2019, €14,504 thousand (H1 2018: €6,450 thousand) related to the non-cash impact of the application of IFRS 2 in relation to a Long Term Incentive Scheme (the “LTIS”) and was the main driver of increased staff costs. On May 16, 2018, the shareholders of our ultimate holding company, Adria Luxco S.à r.l. entered into the LTIS for the benefit of certain members of our current and future management team. The LTIS consists of a payment by the shareholders of Adria Luxco S.à r.l. following completion of an initial public offering or a sale of the Group. The amount of the payment is calculated as a percentage of the proceeds received by the shareholders of Adria Luxco S.à r.l. and is based on the accumulated return on investment achieved by such shareholders. In addition, the increase of Staff costs was due in part to continued expansion, both organic and through acquisitions, of the Group during 2018.
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Media buying
Media buying increased to €19,097 thousand in H1 2019 (H1 2018: nil). This increase was due to the acquisition of Direct Media in September 2018.
Depreciation
Depreciation increased by 11% year-on-year to €51,083 thousand in H1 2019. This increase was primarily due to the expansion of our cable and mobile networks, increasing investment in own-produced content and new assets resulting from acquisitions.
Depreciation (right-of-use assets)
Depreciation increased to €8,990 thousand in H1 2019. This increase was primarily the result of the implementation of IFRS 16 on January 1, 2019.
Amortization of intangible assets
Amortization of intangible assets increased by 32% year-on-year to €40,449 in H1 2019. This increase was primarily due to higher investments into programming rights and own production, as well as the addition of intangible assets of acquired companies.
Other operating expenses
Other operating expenses increased by 18% year-on-year to €56,709 thousand in H1 2019, from €48,010 thousand in H1 2018. This increase was primarily due to acquisitions and certain other operating expenses.
Net finance costs
Net finance costs increased by 37% year-on-year to €40,524 thousand in H1 2019, primarily attributable to higher interest expenses and lower net gain on forward exchange.
Profit/(loss) before tax
Loss before tax increased to €7,432 thousand in H1 2019, from a profit of €9,673 thousand in H1 2018, primarily due to increased staff, content and other operating expenses.
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EBITDA reconciliation
EBITDA is a supplemental measure of financial performance that is not required by, or presented in accordance with, IFRS. We define “EBITDA” as Profit/ (Loss) for the period plus income tax (benefit)/expense, depreciation, amortisation of intangible assets and net finance costs. EBITDA is not a measurement of performance or liquidity under IFRS and you should not consider EBITDA as alternatives to (a) net income as determined in accordance with IFRS as a measure of our operating performance, (b) cash flow for the period as a measure of our ability to meet our cash needs, or (c) any other measure of performance or liquidity under IFRS. We present EBITDA and the ratios derived therefrom, because we believe that they are measures commonly used by investors and they are measures that we use in managing our business. EBITDA, as presented in this report, however, may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated. The following table provides a reconciliation of Profit/ (Loss) for the period to EBITDA.
In €000 H1 2018 H1 2019 Change
Profit/(Loss) for the period 9,775 (11,010) n/a Income tax (benefit)/expense (102) 3,578 n/a Depreciation (inc. right-of-use assets) 46,060 60,073 30% Amortization of intangible assets 30,755 40,449 32% Net finance costs 29,614 40,524 37% EBITDA 116,102 133,614 15% Non-operating expenses 10,575 16,514 56% Adjusted EBITDA 126,677 150,128 19%
The following table provides a build-up of Annualized Last Two Quarters Adjusted Pro Forma EBITDA in €000 L2QA
Annualised L2Q Adjusted EBITDA 300,256
Nova Croatia estimated additional carriage fees 4,155 Direct Media/Pink Acquisition estimated additional carriage fees 12,402 Annualised Last Two Quarters Adjusted Pro Forma EBITDA 316,812
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Gross Leverage and Net Leverage Ratio Our gross leverage ratio (i.e. ratio of Group Gross Debt to Annualized Last Two Quarters Pro Forma EBITDA) and net leverage ratio (i.e. ratio of Group Net Debt to Annualized Last Two Quarters Pro Forma EBITDA) as at June 30, 2019, decreased to 4.74x and 4.64x, respectively, compared to 4.94x and 4.67x as at March 31, 2019.
In €000 H1 2019 a) Annualized Last Two Quarters Pro Forma EBITDA 316,812 b) Cash and cash equivalents 33,473 c) Lease liabilities 114,558 d) SSRCF 39,500 e) Senior Secured Notes 1,450,000 f) Other financial liabilities 11,627 g) IFRS 16 lease liabilities adjustment (112,817) h) As adjusted Group Gross debt (c+d+e+f+g) 1,502,868 i) As adjusted Group Net debt (h-b) 1,469,395
j) Gross leverage (h/a) 4.74x k) Net leverage (i/a) 4.64x
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Liquidity and Capital Resources
Our primary sources of liquidity and funds for capital expenditure, acquisitions and other investments are expected to be operating cash flow, our Existing Revolving Credit Facility, potential additional issuances of debt securities, ancillary and bilateral lending facilities and finance leases. Our ability to generate cash from our operations will depend on our future operating performance, which is in turn dependent, to some extent, on general economic, financial, competitive, market, regulatory and other factors, many of which are beyond our control. We maintain cash and cash equivalents to fund the day to day requirements of our business. We hold cash primarily in euro as well as Serbian dinar, Bosnian mark and other currencies.
Historically, we have relied primarily upon bank borrowings under senior secured credit facilities, other debt facilities and cash flow from operations to provide funds required for investments in capital expenditure and operations.
As at June 30, 2019, we had €33.5 million in cash and cash equivalents. In addition, as at June 30, 2019, we had €1,450.0 million in fixed and floating rate senior secured notes (€450 million of floating rate senior secured notes was refinanced with €550 million Floating Rate Senior Secured Notes due 2025 in H1 2019), along with a partially drawn Revolving Senior Secured Credit Facility of €18.0 million, a €21.5 million unsecured bilateral RCF in Serbia, lease liabilities in the amount of €114.6 million and other financial liabilities of €11.6 million. Cash Flow The table below summarises the consolidated cash flow for the Group for the six months ended June 30, 2019, compared to the six months ended June 30, 2018.
In €000 H1 2018 H1 2019 Change Operating net cash flow 73,074 80,850 7,776 Investing net cash flow 116,212 (113,320) (229,532) Financing net cash flow 4,796 22,512 17,716 Net cash flow 194,082 (9,958) (204,040)
Net cash from / (used in) operating activities
Net cash flows from operating activities increased by €7,776 thousand, from a net cash inflow of €73,074 thousand in H1 2018 to a net cash inflow of €80,850 thousand in H1 2019. This is primarily due to improved operating results.
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Net cash from / (used in) investing activities
Net cash outflows used in investing activities decreased by €229,532 thousand, from a net cash inflow of €116,212 thousand in H1 2018 to a net cash outflow of €113,320 thousand in H1 2019. This decline is primarily due to funds raised in H1 2018 for the acquisitions of CME Croatia and Direct Media Group in Q3 2018 and the settlement of the deferred consideration related to the Direct Media Group acquisition in April 2019.
Net cash from / (used in) financing activities
Net cash flows from financing activities increased by €17,716 thousand, from a net cash inflow of €4,796 thousand in H1 2018 to a net cash inflow of €22,512 thousand in H1 2019, primarily due to the issuance of bonds.
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Capital Expenditure
United Group’s capital expenditure relates primarily to the purchase of property and equipment, including expansion of our network in terms of capacity and new homes connected, purchase of modems and set-top boxes to be installed in customer premises, growth in RGUs and maintenance of our cable and mobile networks and infrastructure, purchase of intangible assets such as content, software, investments in our core infrastructure and systems to facilitate the addition of new services and acquisitions. Therefore, capital expenditure is primarily driven by extending, upgrading and maintaining our cable and mobile networks, the installation and in-home wiring for new subscribers, the cost of cable modems, including high-speed modems for subscribers to our high-speed broadband internet, as well as the acquisition and production of content. Our capital expenditure has also historically included certain investments of a non-recurring nature, as well as costs to integrate acquired businesses.
Capital expenditure also includes increases in intangible assets (except our customer list and brand names) and does not include financial assets. As part of our strategy to focus on capital expenditure improving returns, we have implemented measures to ensure a more efficient usage of capital investment. We intend to manage capital expenditure to maintain our well-invested asset base. The members of our board review all material capital expenditure programmes.
Over the next several years, we expect that our capital expenditure will be largely success and capacity based. Success and capacity-based capital expenditure includes capital expenditure related to the expansion of our network footprint to additional homes and existing subscribers, the replacement of set-top boxes, expanding network capacity, new product and service development and expenditure incurred when connecting business subscribers to our network. Success based capital expenditure does not include capital expenditure for maintenance, upgrade and replacement of our systems and infrastructure.
Our capital expenditure for H1 2019 amounted to €92.5 million5, compared to €86.4 million in H1 2018.
5 IFRS view of capex. Management CAPEX in H1 2019 amounted to €93.5 million compared to €85.5 million in H1 2018 (shown in table below).
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CAPEX by Segment * (management view) in €000 H1 2018 H1 2019 Change
SBB Serbia 25,846 31,704 23% Telemach Slovenia 33,492 28,911 (14%) Telemach BH 7,262 6,816 (6%) Telemach MNE Segment 2,442 1,807 (26%) United Media 15,179 23,813 57% Other 1,313 452 (66%) Total 85,534 93,503 9%
SBB Serbia: Capital expenditure for SBB Serbia increased by 23% year-on-year to €31,704 thousand in H1 2019, mostly due to higher customer premises equipment and network investments compared to H1 2018. Telemach Slovenia: Capital expenditure for Telemach Slovenia decreased by 14% year-on-year to €28,911 thousand in H1 2019, as H1 2018 financial information includes the one-time purchase of a new building in Ljubljana and cable network upgrade. Telemach BH: Capital expenditure at Telemach BH in H1 2019 decreased by 6% year- on-year to €6,816 thousand, mostly due to lower customer premises equipment compared to H1 2018.
Telemach MNE: Capital expenditure for the Montenegro segment decreased by 26% to €1,807 thousand in H1 2019 due to a lower level of network investments and less capitalized inventories compared to H1 2018.
United Media: Capital expenditure for United Media increased by €8,634 thousand to €23,813 thousand in H1 2019 due to investments into the production of new exclusive content for certain of our channels, the effect of acquisitions and the increased cost of sports rights.
Please refer to Appendix 5 for specific quantitative and qualitative disclosures about market risk and Appendix 6 for our critical accounting policies.
Adjusted EBITDA-CAPEX increased from €40,315 thousand in H1 2018 to €57,618 thousand in H1 2019.
In €000 H1 2018 H1 2019 Change Adjusted EBITDA 126,677 150,128 19% CAPEX * (IFRS view) 86,362 92,510 7% Adjusted EBITDA – CAPEX 40,315 57,618 43%
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Subsequent (Material Recent) Events
On May 31, 2019, the Group agreed to acquire Tele2 d.o.o. Croatia for an enterprise value of €220 million. Subsequently, on July 4, 2019, the Group issued an additional €200 million in aggregate principal amount of its existing Senior Secured Notes due 2024, the proceeds of which are expected to be used, in part, to finance the acquisition.
In July 2019, the ownership structure of the Group changed as the European Bank for Reconstruction and Development (EBRD) re-took an ownership stake. BC Partners now owns approximately 52.3%, senior management approximately 38.5%, KKR approximately 6.8% and EBRD approximately 2.4% of the shares.
The Group’s management confirms that they are not aware of any other significant post balance sheet events that could affect the consolidated financial statements for 30 June 2019 or require separate disclosure.
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Mergers & Acquisitions
On April 3, 2019, Netlogic d.o.o. Serbia merged with SBB d.o.o. Serbia.
On May 31, 2019, the Group agreed to acquire Tele2 d.o.o. Croatia (See “Subsequent (Material Recent) Events”).
United Group continually monitors M&A opportunities and is currently in the early stages of evaluating multiple potential opportunities. In line with its stated strategy, the Group is looking for acquisitions that are value accretive and offer substantial synergies with the Group’s existing operations.
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Group Background
We are the leading distributor of cable and satellite pay TV in Slovenia, Serbia, Bosnia and Herzegovina and Montenegro, where we also provide broadband internet and fixed line telephony services. Additionally, we offer mobile telephony services in Slovenia and distribute satellite pay TV across the six countries of former Yugoslavia, Slovenia, Serbia, Bosnia and Herzegovina, North Macedonia and Montenegro.
We are the only pan regional distribution platform in a region of approximately 20 million people and we are the leading multi-play provider in our primary markets, where we combine our services into packages, or bundles, which offer subscribers the convenience of being able to purchase television, broadband internet and telephony services from a single provider. This model provides us with significant opportunities to cross-sell our products.
We believe that we have been able to establish our business as one of the leading distribution platforms in our region due to our attractive content portfolio. This has been established through our ownership of specific key pay TV channels, long term contracts with third parties, our well invested network that provides, among other things, one of the highest internet download speeds in our markets, and our high quality customer service which has led to low churn rates that we believe evidencing a satisfied customer base.
Management Team
Many of our key management members have been with our business since its inception, including our Executive Chairman and Founder, Dragan Šolak, our Chief Executive Officer of the Group and Group Vice President – Marketing and Media, Victoriya Boklag and our Group Vice President - Operations, Violeta Vasilijević. Our senior management team has substantial experience in the telecommunications, media and technology industries, as well as in banking, private equity and corporate finance. Many members of our senior management team have held a number of different positions within our business and have shaped the direction of its development and its organic growth within the region.
Dragan Šolak—Founder and Executive Chairman of the Group. Mr. Šolak founded SBB in 2000 and has been a member of our management since the Group’s inception. In 2009, Mr. Šolak assumed the role of Group Executive Chairman. In his current role, he continues to be involved in all aspects of the business and is responsible for the overall strategic leadership of the Group. Victoriya Boklag—Chief Executive Officer of the Group and Group Vice President— Marketing and Media. Ms. Boklag has been with the management team since the Group’s inception in 2000. Before taking over the role of United Group’s chief executive officer and vice president of marketing and media, Ms. Boklag held several positions in finance and
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commercial operations and acted as the chief executive officer of SBB. Ms. Boklag is also a member of the Board of SBB Foundation. She holds a BA degree from the ICU Kiev. Violeta Vasilijević—Group Vice President—Operations. Ms. Vasiljević has been with the management team since the Group’s inception in 2000. She is currently responsible for the technical and operating support for all of the Group’s administrative functions and products. Ms. Vasiljević holds a degree in Mechanical Engineering from the University of Kragujevac. Janez Živko—Vice President Finance. Mr. Živko joined the management team of United Group in March 2015. Prior to joining, Mr. Živko served as the CFO of the Petrol Group, one of the largest companies in Slovenia. He has also served in numerous roles at Gorenje Group over a period of seven years, including Director of Finance and Deputy CFO. Mr. Živko began his career in 1998 as a financial analyst and subsequently became financial controller for European operations at ACT Teleconferencing in Denver, Colorado. He holds an MBA (in Finance) from the University of Denver in Colorado, USA. Željko Batistić—Group Vice President—Technology. Mr. Batistić first joined the management team in May 2012. Prior to joining, Mr. Batistić was an experienced CATV manager and served at a Croatian cable operator at B.net Croatia from 2007 to 2012. Mr. Batistić holds a Master’s degree in Electrical Engineering from the Faculty of Electrical Engineering and Computing, University of Zagreb and an Executive MBA degree from Cotrugli Business School, Zagreb. Vladislav Ratajac—Group Vice President—Corporate Development. Mr. Ratajac joined the management team in 2011. Mr. Ratajac held positions at Mid Europa Partners from 2008 to 2011 and Deutsche Bank before joining the Group. Mr. Ratajac holds a degree in Economics from Rutgers University in New Jersey, USA. Dragica Pilipović Chaffey—Group Vice President—Corporate Affairs. Ms. Pilipović Chaffey joined the management team in 2009. Prior to her current role, Ms. Pilipović Chaffey held a number of senior posts within the European Bank for Reconstruction and Development (EBRD) from 2007 to 2009, and the IMF in Washington, D.C. Ms. Pilipović Chaffey holds an MBA from George Washington University, Washington, D.C., and a BA in Economics from the University of Belgrade. Steve Leroy—Group General Counsel. Mr. Leroy joined the management team in September 2018 as Group General Counsel. Before joining the Group, Mr. Leroy held a number of leadership roles at Discovery, Anheuser-Busch InBev, and The Coca-Cola Company. Mr. Leroy was also a lawyer in Brussels and chief of staff to the governor Antwerp in Belgium. Mr. Leroy holds a Master’s degree in Law from Katholieke Universiteit Leuven, Belgium; a Master’s degree in Commercial & Consular Sciences from Hautes Etudes Commerciales St. Louis (Groupe ICHEC), in Brussels, Belgium; a Master of Business Administration (MBA) from INSEAD, in Fontainebleau, France; and the specialized Master’s degree in EU Competition Law & Economics from the Brussels School of Competition, Belgium. Aleksandra Subotić—Chief Executive Officer—United Media. Ms. Subotić joined the management team in 2014. Previously, Ms. Subotić was a General Manager at Net TV Plus.
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Prior to joining us, Ms. Subotić worked as General Manager at Daniel SatTV, a satellite and cable network development company in Serbia, and at Total TV Info, a distribution company in Austria. She holds an MBA degree in Economics from Educons University. Adrian Ježina—Chief Executive Officer—Telemach Slovenia. Mr. Ježina joined the management team in 2017. Prior to joining, Mr. Ježina was the CEO of Siemens Convergence Creators Adria Region. He graduated in 2009 at the Faculty of Electrical Engineering, Mechanical Engineering and Naval Architecture in Split. He also holds an Executive MBA degree from the Cotrugli Business School. Admir Drinić—Chief Executive Officer—Telemach BH. Mr. Drinić serves as Chief Executive Officer of Telemach Bosnia and Herzegovina, having joined the Company in 2013 as Chief Operating Officer. His previous positions include member of the Securitas BiH Board of Directors, Chief Executive Officer of the B.I.G.A. Sarajevo security agency, and Chief Technology Officer of Gama Sigurnost Sarajevo. He holds a bachelor’s degree in economics from the University for Business Studies, Faculty of Economics, in Banja Luka, in 2009. Milija Zeković—Chief Executive Officer—Telemach Montenegro. Mr. Zeković joined the management team in October of 2018. Previously, he was Chief Executive Officer of Crnogorski Telekom from 2016 to 2017. He was also Chief Commercial Officer of Crnogorski Telekom from 2015 to 2016. He holds a degree in Economics from the University of Montenegro. Nikola Francetić—Chief Executive Officer—Net TV Plus. Mr. Francetić joined the management team in October of 2018. Previously, he was head of content, broadcasting and media for A1 Telekom Austria Group from 2014 to 2018 and an executive director for content at T-HT Croatian Telekom from 2011 to 2014. He holds an MBA from the Bled School of Business in Slovenia and a degree in Experimental Physics from the University of Zagreb.
Shareholder Structure
Following the EBRD’s purchase of a minority stake in the Group in July 2019, BC Partners now owns approximately 52.3% of the Group’s shares, senior management approximately 38.5%, KKR approximately 6.8% and EBRD approximately 2.4%. BC Partners is a leading global investment firm. Founded in 1986 as one of the first pan-European buy-out investors, BC Partners has grown and evolved into a leading alternative investment firm, investing principally in larger businesses in Europe and North America. Since inception, BC Partners has completed 109 acquisitions with a total enterprise value of over €135 billion and is currently advising funds totaling over €20 billion.
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Appendices
Appendix 1 - Financial statements Income Statement in €000 H1 2018 H1 2019
Revenue 285,412 363,946 Other income 8,526 5,092 Content costs (44,954) (60,762) Satellite capacity costs (2,509) - Link and interconnection costs (20,397) (19,673) Material costs (20,538) (22,217) Staff costs (36,170) (52,491) Media buying - (19,097) Impairment loss on trade and other receivables, inc. contract assets (5,258) (4,458) Impairment loss on other financial assets - (17) Other operating expenses (48,010) (56,709) IFRS EBITDA 116,102 133,614
Depreciation (46,060) (51,083) Depreciation (right-of-use assets) - (8,990) Amortisation of intangible assets (30,755) (40,449) Results from operating activities 39,287 33,092
Finance income 4,569 2,189 Finance costs (34,183) (42,713) Net finance costs (29,614) (40,524)
Profit/(loss) before tax 9,673 (7,432)
Income tax (expenses)/benefit 102 (3,578) Profit/(Loss) for the period 9,775 (11,010)
Currency translation differences (1,335) 789 Other comprehensive loss (income) for the period (1,335) 789
Total comprehensive loss (income) for the period 8,440 (10,221)
(Loss)/profit attributable to: Owners of the Company 8,488 (12,698) Non-controlling interests 1,287 1,688 (Loss)/profit for the period 9,775 (11,010)
Total comprehensive (loss)/income attributable to: Owners of the Company 7,153 (11,909) Non-controlling interests 1,287 1,688 Total comprehensive (loss)/income for the period 8,440 (10,221)
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Statement of Financial Position in €000 H1 2018 H1 2019 Assets Property, plant and equipment 388,131 411,520 Goodwill 650,089 763,325 Intangible assets 244,612 295,317 Investment property 361 310 Right-of-use assets - 112,363 Loans to related parties 32,014 - Other financial assets 12,143 7,562 Non current prepayments 51 132 Contract assets 5,014 5,593 Deferred costs 3,274 5,374 Deferred tax assets 9,118 3,579 Non-current assets 1,344,807 1,605,075
Inventories 7,359 22,538 Trade and other receivables 114,450 156,734 Short term loans receivables and deposits 5,111 7,512 Prepayments 42,449 37,351 Contract assets 8,293 20,797 Income tax receivable 6,364 7,810 Cash and cash equivalents 226,648 33,473 Current assets 410,674 286,215 Total assets 1,755,481 1,891,290
Equity Issued and fully paid share capital 125 125 Share premium 337,557 352,557 Capital reserves 6,450 47,313 Translation reserves (15,361) (14,253) Accumulated losses (236,725) (359,669) Equity attributable to owners of the Company 92,046 26,073 Non-controlling interests 10,039 9,499 Total equity 102,085 35,572
Liabilities Loans and borrowings 87,461 35,475 Other financial liabilities 1,328,632 1,433,619 Long term liabilities 274 3,522 Long term provisions 21,926 21,524 Deferred income 6,095 3,670 Contract liabilities - 1,941 Lease liabilities 966 94,653 Deferred tax liabilities 29,371 28,285 Employee benefits 605 623 Non-current liabilities 1,475,330 1,623,312
Trade and other payables 158,400 173,044 Current tax liabilities 4,876 9,165 Loans and borrowings 1,003 14,008 Deferred income 11,030 4,927 Contract liabilities - 11,357 Lease liabilities 2,757 19,905 Current liabilities 178,066 232,406 Total liabilities 1,653,396 1,855,718 Total equity and liabilities 1,755,481 1,891,290
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Statement of Cash Flows in €000 H1 2018 H1 2019
Cash flows from operating activities (Loss)/profit for the period 9,775 (11,010) Adjustments for: - - Depreciation 46,060 60,073 Amortization 30,755 40,449 Impairment of trade and other receivables 4,769 4,096 Impairment of contract assets 489 362 Impairment of other financial assets - 17 Impairment of inventories 138 615 Share based payment 6,450 14,504 Long term provisions - (1,171) Income tax expense/(benefit) (102) 3,578 Gain on sale of subsidiary (7,654) - Net finance cost 29,614 40,524 Operating cash flows before WC changes 120,294 152,037
Changes in: Trade and other receivables (10,695) 3,159 Deferred income (4,657) (2,545) Deferred cost (99) (989) Contract assets (6,167) (9,678) Contract liabilities - 3,791 Employee benefits (34) (8) Inventories (497) (950) Prepayments (14,646) (1,713) Trade and other payables 22,810 (22,902) Cash generated from operations 106,309 120,202
Interest paid (30,392) (33,531) Income tax paid (2,843) (5,821) Net cash from operating activities 73,074 80,850
Cash flows from investing activities Acquisition of property, plant and equipment (64,925) (57,993) Acquisition of intangible assets (25,359) (31,303) Acquisition of subsidiaries, net of cash acquired - (52,769) Short-term loans receivables and deposit inflows 204,237 (1,537) Change in other non-current financial assets - 30,000 Other inflows 2,259 282 Net cash (used in)/provided by investing activities 116,212 (113,320)
Cash flows from financing activities Proceeds from share premium - 15,000 Proceeds from bond issue - 550,000 Repayment of bond - (450,000) Proceeds from borrowings 84,000 157,800 Repayment of borrowings (74,458) (181,331) Transaction costs related to loans and borrowings - (5,500) Acqusition of non controlling interest (13) (1,096) Repayment from lease liabilities (2018: Repayment of finance lease liabilities) (3,263) (10,600) Dividends paid (1,470) (51,761) Net cash provided by financing activities 4,796 22,512
Net (decrease)/increase in cash and cash equivalents 194,082 (9,958) Cash and cash equivalents at 1 January 32,560 43,430 Effects of movements in exchange rates on cash in hands 6 1 Cash and cash equivalents at end of period 226,648 33,473
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Appendix 2 - Key Factors Affecting Our Business and Results of Operations The performance of our businesses, our results of operations and the key operating measures discussed below have been, and will continue to be, affected by a variety of factors. Certain of these factors are discussed below.
Products, Services and Content
Our results are impacted by our product mix as well as our ability to introduce new products and upgrades and successfully sell those products and upgrades to increase our RGUs and ARPUs. We continually evaluate the suite of products and services we provide to our subscribers to ensure that we remain competitive with other providers in our markets and have an opportunity to increase our subscriber base and the number of products we sell to our subscribers. We accomplish this through product innovation, investments in technology and acquisitions of complementary businesses. For example, we have expanded our product offering by introducing fixed-line services to offer multi-play packages in Slovenia, Serbia, Bosnia and Herzegovina and Montenegro, including pay television, broadband internet access, fixed-line telephony, as well as mobile telephony services in Slovenia.
We believe that media and communications services customers will increasingly choose bundled products because of the convenience and enhanced value they offer. As at June 30, 2019, 78% of our customer base in Slovenia, 75% of our customer base in Serbia and 81% of our customer base in Bosnia and Herzegovina subscribed for one of our multi-play packages.
We seek to be the leader in our markets in pay-television content and have entered into long-term strategic partnerships with key international and regional content owners. We have also acquired leading regional content owners in key television sub segments (sports, lifestyle, children and films) such as providers of the Sport Klub family of channels (which includes Sport Klub, Golf Klub and our fishing and hunting channels) and Cinemania. Our ability to maintain the quality of our content impacts our ability to sell our pay television offerings, as well as bundled packages.
Our product mix can also impact our margins. For example, our mobile telephony business and our content business generally have lower margins compared to our cable-based business. Our success in growing these businesses may impact our product mix and therefore may affect our Adjusted EBITDA margins.
Pricing of our Products and Services
Increasing demand for attractive content and higher broadband speeds allows us to increase the prices at which we provide these services while maintaining relatively low churn rates. We regularly review the prices of our products and services, however, and in the past have adjusted our subscription fees as necessary in line with inflation, changes in foreign exchange rates or in response to market conditions and content costs. Changes in the pricing
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of our products and services will impact the revenues and margins that we generate from these products and services and impact our ability to attract new customers. For example, our multi-play bundles offer subscribers higher value in terms of channels, speeds functionality and add-on features. The pricing of all our services, including our multi-play bundles, is dependent on market conditions, pricing by competitors with similar offerings and the perceived quality of our products versus other products. In relation to our Basic TV package, we were also subject to price regulation in Serbia until January 2017. From January 2017, the price of our Basic TV package in Serbia is no longer subject to price regulation. However, such price regulation might be reinstated in the future and the Serbian Commission for Protection of Competition is currently investigating our price increases made with effect from January 1, 2018.
Subscriber Churn
The television, broadband internet and telephony industries exhibit churn as a result of high levels of competition. In addition to competitive alternatives, churn levels may be affected by changes in our prices or our competitors’ prices, our level of subscriber satisfaction, subscriber mortality and the relocation of subscribers, as well as from the termination of agreements. An increase in churn may lead to increased costs and reduced revenues when subscribers cancel our services as we incur additional marketing and advertising costs to find new subscribers.
Increasing demand for attractive content and higher broadband speeds allows us to increase the prices at which we provide these services while maintaining relatively low churn rates. We believe our relatively low churn rates provide us with recurring cash flows and visibility with respect to future revenues. We have historically experienced low churn rates in our television, broadband internet and fixed-line telephony businesses, and the churn we have experienced in these businesses has primarily been driven by customers moving outside of our current geographic area of services as well as termination of services due to their inability to pay, with only a limited amount of churn driven by competition. We believe that launching telephony in our markets, further driving digitization, providing our subscribers with multi-play packages (including quad-play in Slovenia, as described in more detail below), expanding our cable footprint to broaden our geographic reach and benefiting from increasing disposable incomes in the region (reducing the likelihood of customers’ bad debt), will allow us to maintain low churn rates for cable pay-TV.
We believe that our control of a mobile network in Slovenia, following our acquisition of Tušmobil, has allowed us to develop an attractive suite of fixed mobile convergence services in Slovenia which, among other things, has had the effect of reducing the churn of our mobile postpaid subscribers in Slovenia. Since our acquisition of Tušmobil, our number of quad play subscribers in Slovenia has increased to 30% of our subscribers in Slovenia, from 1% of our subscribers prior to the acquisition. In addition, we have successfully reduced the blended annual churn rate of our mobile postpaid subscribers to 9% at June 30, 2019 from 18% at January 31, 2016. This is primarily due to our attractive products and services and an increase
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in the number of new mobile postpaid subscribers (each with new contractual obligations). We define blended annual churn as net lost subscribers (the number of customers that either on a voluntary or involuntary basis no longer subscribe for a certain service) divided by the number of all unique cable subscribers at the beginning of period, which result is then annualized. The churn rate of mobile prepaid subscribers is relatively higher due to the non- contractual nature of the relationship with such subscribers.
Cost of Services Provided
Our most significant costs include:
(i) carriage fees which we pay to international and regional broadcasters such as Fox, Discovery and Pink, in order to carry their programs on our distribution network,
(ii) licensing fees payable to sports rights owners such as the English Premier League, National Basketball Association, the Spanish Premier League, ATP and Formula 1 in order to develop content for our own channels,
(iii) satellite capacity costs,
(iv) payroll costs,
(v) internet and interconnection fees,
(vi) costs of materials used to connect subscribers to our network and
(vii) costs for marketing and sales.
Most of our costs, such as a portion of our network operations, customer care, billing and administration costs, are relatively fixed, while a portion of our marketing and customer services costs is variable. Our content acquisition costs are mostly fixed and a decreasing portion of these costs are subscriber-based. Where possible, we aim to negotiate fixed-rate content costs. This allows us to anticipate the input price of our content and price our products accordingly. The costs associated with the growth of our business, such as RGU acquisition costs, which are primarily comprised of campaign costs and sales costs for attracting new subscribers, are variable costs.
A large portion of our costs is content costs, accounting for 26% of our operating expenses (excluding depreciation and amortization of intangible assets) in H1 2019. While we own a portion of our content, we are dependent on broadcasters and other content owners for most of our programming. We pay license fees to several regional and international broadcasters in order to broadcast their programs. For on-demand content purchased by our subscribers, we generally pay a revenue share of the retail price, subject, for certain on-demand content, to fixed minimum guarantees. For packaged on-demand content (subscription video on demand) we pay on a per-subscriber basis, sometimes with minimum guarantees. We generally expect that our content costs (above the minimum amounts) will increase in line with increased revenues from digital pay-TV and on-demand content. In the
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past we have successfully obtained rebates and discounts for our content, but these may not continue in the future.
We pay fees to satellite operators to uplink and transmit our content to our DTH subscribers, and we also use other network operators to have telephone calls of our customers connected to customers of their respective networks (interconnection). Generally, the amount we pay in interconnection fees in any period will depend on the level of usage of our services.
Our staff cost is impacted by the number of personnel we employ, the experience levels at which such persons are employed and increases in salaries and bonuses due to performance factors. Labor costs of technicians, spent on the construction and upgrade of our network and acquisition of subscribers, are capitalized as tangible and intangible assets.
RGU acquisition costs include campaign costs and sales costs. We target to recover RGU acquisition costs over the duration of the service contract. Factors that contribute to successful recovery of RGU acquisition costs include our operational efficiency, the density of our subscriber base and our direct relationships with our subscribers, which enables us not to rely on intermediaries to interact with our customers.
Network and Technological Advances
Our ability to provide new high definition and on-demand digital TV services, broadband internet access at higher speeds and telephony services to subscribers depends, in part, on our ability to upgrade and maintain our network. We incur capital expenditure charges in periods over which these upgrades are made, with the aim of recouping these investments through increased revenues and profitability.
Our ability to compete effectively and maintain or increase our customer base depends on our ability to anticipate and react quickly to technological developments and evolving industry standards and develop successful new and enhanced products and services to adapt to the changing market. We invest in new or enhanced technologies, products or services in periods over which industry standards change, or to upgrade our technologies. Additionally, we incur capital expenditure costs relating to the replacement of existing equipment.
Foreign Currency Exchange Rates
We operate across the Balkan region generating revenues in many local currencies, which fluctuate from time to time in relation to the euro. Our revenues in Slovenia and Montenegro are generated in euro. SBB Serbia, Telemach BH and Nova TV record their financial results in their respective functional currencies (the Serbian dinar, the Bosnian and Herzegovinian mark and Croatian kuna, respectively), which are then translated into euros in preparing our consolidated financial statements. In H1 2019, 55% of our revenue was generated in euros or currencies pegged to the euro, with 37% of revenue generated in the Serbian dinar and 8% of revenue generated in Croatian kuna. While the Bosnian and Herzegovinian mark is pegged against the euro at a fixed exchange rate of BAM 1.9558 per
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€1.00, the Serbian dinar and Croatian kuna freely fluctuate against the euro. In H1 2019, the value of the Serbian dinar increased approximately 0.1% relative to the Euro compared to H1 2018. However, due to the historic indexation of the Serbian dinar against the German mark, which was replaced by the euro in 2002, we believe the Serbian consumer price index closely tracks the depreciation of the Serbian dinar against the euro which has historically allowed us to “pass through” a portion of the impact of the depreciation of the dinar to our customers. We believe that our pricing strategy reflects this “pass through” principle. In H1 2019, the value of the Croatian kuna decreased approximately 0.2% relative to the Euro compared to H1 2018. The Croatian National Bank’s chose the stability of the exchange rate of the Croatian kuna against the euro as the nominal anchor of the monetary policy and occasionally participates in the foreign exchange market, mostly when it considers the exchange rate fluctuation to be or may become excessive.
We present our consolidated financial statements in euro. As a result, we must translate the assets, liabilities, revenue and expenses of all of our operations with a functional currency other than the euro into euro at then-applicable exchange rates. Consequently, increases or decreases in the value of these currencies against the euro may affect the value of our assets, liabilities, revenue and expenses with respect to our non-Euro businesses in our consolidated financial statements, even if their value has not changed in their original currency. These translations could significantly affect the comparability of our results between financial periods and result in significant changes to the carrying value of our assets, liabilities and stockholders’ equity.
Additionally, certain of our expenses, primarily content and satellite costs, are in euro and U.S. dollar. Where we are unable to match sales received in foreign currencies with costs paid in the same currency, our results of operations are impacted by currency exchange rate fluctuations. A substantial portion of our indebtedness is denominated in euro. In March 2015, we entered into a EUR/USD currency hedge agreement, pursuant to which we hedge a part of our exposure to the U.S. dollar. We entered into an additional EUR/USD currency hedge agreement in May 2016 pursuant to which we hedged the remaining portion of our exposure to the U.S. dollar for the year 2016. An additional EUR/USD hedge was implemented in February 2017, which hedged most of our 2017 USD exposure. Based on our estimated lack of any additional material exposure to the U.S. dollar in 2018 and 2019, we have not entered into any additional currency hedge agreements as of June 30, 2019.
Growth in our Markets
Three of our key markets, Serbia, Bosnia and Herzegovina and Montenegro, are generally characterized by lower internet broadband household penetration rates compared to elsewhere in Western Europe and the CEE and both Serbia and Bosnia and Herzegovina have lower pay television household penetration rates compared to elsewhere in Western Europe and the CEE. As a result, growth in our markets has been higher than in certain CEE and Western Europe jurisdictions. We believe this is primarily due to the increasing importance of high-quality broadband internet and an increasing convergence of our regions with the EU.
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Slovenia is a more mature market, with subscriber rates similar to the CEE, and as a result, growth in that market will depend more on our ability to effectively compete with other market participants and to continue to offer high-quality customer propositions. A number of factors will impact the rate of growth of pay television, broadband internet and telephony industries in our markets, including economic conditions, political stability, increases in infrastructure and an increased distribution of wealth. These industries may not grow at the same rate as they have in the past.
Regulation
Our operations are subject to various regulations in Europe and in our regional markets. We are generally free from price regulation other than, prior to January 2017, with respect to our Basic TV package in Serbia, due to SBB Serbia’s prior SMP in the Serbian pay-TV market. Since the beginning of 2017, we are no longer considered a significant market participant in the pay-TV market in Serbia, thus our Basic TV package is no longer subject to price regulation, though this may change in the future. Prior to this change in January 2017, the pricing of our Basic TV package in Serbia, which accounted for 12% of our revenue in H1 2019, and which we use as a platform to up- and cross-sell our products, was regulated and we were not permitted to increase the price for such packages without regulatory approval. In 2015, our first application for a price increase for this package was not accepted by the Serbian regulator; however, our second application, in November 2015, was accepted by the Serbian regulator, and we implemented price increases for our Basic TV package in Serbia on January 1, 2016. We also implemented price increases in January 2017, but the Serbian Commission for Protection of Competition is currently investigating our price increases made with effect from January 1, 2018. In addition, we may be subject to conditions imposed in connection with competition authority clearances as we continue to expand our business through bolt-on, value accretive acquisitions and we may be subject to market power analysis from the relevant regulators, which could force us to adjust our prices or sell various parts of our businesses.
Tax Treatment in Local Jurisdictions
The results of our operations depend on our tax treatment under the tax laws and regulations of local jurisdictions. For instance, in Serbia, taxable income can be reduced in the same proportion as capital expenditure for the year in Serbia divided by the carrying amount of assets in Serbia. Due to our significant capital expenditure in Serbia in 2016, we believe we have satisfied the requirements to be granted a ten-year tax beneficial status, expiring in 2025, and we recorded beneficial tax treatment for the SBB Serbia segment in H1 2019. Additionally, under thin capitalization rules in Serbia, interest and related costs under intercompany loans are recognized as deductible expenses to the extent the intercompany loans do not exceed four times the borrower’s equity. In 2016, SBB Serbia capitalized €82.7 million of intercompany loans, so we received a tax allowance of four times the interest expense relating to such capitalized intercompany loans. In 2017 and 2018 SBB Serbia did not capitalize any intercompany loans. During December 2018, the Serbian Tax Authority notified
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us of its preliminary findings that it has re-characterized interest payments made by SBB Serbia under an intragroup loan agreement (and certain other transactions) as dividends, which would have been subject to a 5% withholding tax (and if there is a final decision against SBB Serbia, we believe the potential liability could be approximately €20 million).
Furthermore, in Slovenia, Telemach Slovenia can use a tax allowance for investment in equipment and intangible assets (available for investments made after January 1, 2008), whereby the tax allowance is limited to 40% of the value of the assets, up to the amount of the tax base. In 2016, Telemach Slovenia used the tax allowance for investments in the amount of €1.5 million. In 2016, 2017 and 2018 Telemach Slovenia used the tax allowance for investments in the amount of €1.5 million, €7.8 million and €15.8 million, respectively.
In Bosnia and Herzegovina, a taxpayer who invests more than BAM 20.0 million (approximately €10.2 million) in production assets (property, plant and equipment) within the territory of Bosnia and Herzegovina for five consecutive years is relieved from 50% of taxation on such investments for a period of five years, starting from the first year in which it has invested at least BAM 4 million (approximately €2.0 million). Telemach BH received relief of BAM 6.3 million (approximately €3.2 million) in 2016 pursuant to this provision. In 2017 and 2018, Telemach BH received a tax allowance for investments in the amount of BAM 4.5 million (approximately €2.3 million) and BAM 6.1 million (approximately €3.1 million), respectively. In Bosnia and Herzegovina, a taxpayer receives a tax allowance when it employs certain types of employees, and in 2017 and 2018, Telemach BH received a tax allowance for certain new employees in the amount of BAM 790 thousand (approximately €0.4 million) and BAM 1.3 million (approximately €0.7 million), respectively.
Implementation of New Accounting Policies
IFRS 16 Leases
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases.
Definition of lease Previously, the Group determined at contract inception whether an arrangement was or contained a lease under the IFRIC 4 and IAS 17. The Group now assesses whether the contract is or contains a lease based on the new definition of lease. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.
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The Group applied the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.
As a lessee The Group leases many assets including properties, satellite, facilities and infrastructure which was previously recognized under operating lease.
Previously, the Group recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised.
Under IFRS 16, the Group recognise new assets and liabilities for its operating leases of satellite, office facilities, part of infrastructure, as well base stations. The nature of expenses related to those leases has been changed because the Group will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities.
The carrying amount of right-of-use assets and lease liabilities are presented below:
30-Jun-19 1-Jan-19 Land and properties 19,506 20,532 Machinery and equipment 60,738 65,529 Office premises 10,927 12,177 Optic fibers 20,272 21,193 Motor vehicles 911 697 Other 9 12 Total right-of-use assets 112,363 120,140
30-Jun-19 1-Jan-19 Current lease liabilities 19,437 18,628 Non-current lease liabilities 93,380 100,162 Total lease liabilities 112,817 118,790
As a lessor
No significant impact for the Group’s finance leases in which the Group is a lessor.
Transition and impacts on transition
The Group applies the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets for property leases were measured on transition as if the new rules had always been applied. All other right-of-use
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assets were measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).
The change in accounting policy affected the following items in the balance sheet on 1 January 2019:
1-Jan-19 RoU assets increase/(decrease) 120,140 Prepaid expenses increase/(decrease) (288) Borrowings (increase)/decrease (1,062) Lease liabilities (increase)/decrease (118,790)
EBITDA for 30 June 2019 increased as a result of the change in accounting policy while the operating profit decreased. The following segments were affected by the change in policy:
EBITDA Operating profit Net profit
Serbia Group 3,639 (289) (1,250) Slovenia Group 3,543 (1,199) (543) Bosnia Group 629 76 (54) Montenegro Group 80 2 (8) Media Group 1,699 157 (69) Total positive/(negative) impact on Group's 9,590 (1,253) (1,924) reportable segment information
IFRIC 23
In June 2017, the IFRS Interpretation Committee issued IFRIC 23, which clarifies the accounting treatment of uncertainties in income taxes, specifically in relation to taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12.
IFRIC 23 states that an entity should assume that the applicable taxation authority will have full knowledge of all relevant information when examining amounts reported to it. An entity therefore has to consider whether it is probable that the applicable authority will accept a certain tax treatment in the entity’s income tax filing and either adopt an approach consistent with the tax treatment in its income tax filings or use the expected value of the tax treatment when determining taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates.
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Appendix 3 - Definitions of Key Operating Measures Homes passed: represents all homes connected to our network directly and through third party networks. We provide our services to subscribers directly over our network and over certain cable networks owned by third parties with whom we have entered into exclusive or non-exclusive agreements to provide our services over their networks.
Unique cable subscribers represent the number of individual end-users who have subscribed to one or more of our cable-based services. In all of our cable markets, cable pay- TV is the basic service that a cable unique subscriber is typically required to subscribe to in order to receive our other services such as broadband internet access and telephony. A unique cable subscriber may subscribe to several different services, thereby accounting for only one unique cable subscriber, but several RGUs. Cable pay-TV RGUs includes the sum of our analog and digital cable pay-TV RGUs in Slovenia and our total analog cable pay-TV RGUs (without separately counting analog cable RGUs that have purchased digital top ups) in Serbia, Bosnia and Herzegovina and Montenegro provided within our network footprint. OTT RGUs consists of our NetTV Plus and out of footprint Eon subscribers. Broadband internet RGUs represents residential broadband internet provided within our network footprint. Fixed-line telephony RGUs represents residential fixed line telephony provided within our network footprint. Mobile RGUs represents mobile telephony services provided to customers in Slovenia, where we have operated as an MNO since our acquisition of Tušmobil in April 2015. Prior to April 2015, we provided mobile services to our customers as an MVNO. Other services includes multichannel multipoint distribution service based services, ADSL internet services and cable services provided outside of our network footprint. Penetration represents the number of RGUs at the end of the relevant period as a percentage of the number of homes passed by our network. Blended cable ARPU is calculated by adding together, for each month in a given period, the total cable pay-TV, broadband internet and fixed-line telephony revenues (including fixed-line telephony usage revenues and excluding minor installation fees) for that particular month divided by the average number of cable pay-TV RGUs for that month and then dividing that sum by the total number of months in the period. Blended cable ARPU does not include mobile ARPU. We calculate mobile ARPU by adding together, for each month in a given period, the total mobile telephony revenues (excluding revenues generated by customers of other networks roaming on our network and excluding wholesale revenues) for that particular month divided by the average number of mobile RGUs for that month and then dividing that sum by the total number of months in the period. DTH subscribers represent the number of individuals across the six South Eastern European markets (Slovenia, Serbia, Bosnia and Herzegovina, Croatia, Montenegro and North
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Macedonia) who have subscribed to our DTH pay-TV services. We believe that most of these subscribers are outside of our cable footprint. Typically, DTH subscribers are only able to subscribe to DTH based pay-TV services and represent a single RGU. However, we are re selling ADSL services purchased from our competitors in the respective markets to DTH subscribers.
Average monthly revenue per user, (“ARPU”): A measure we use to evaluate how effectively we are realizing potential revenues from subscribers. ARPU is calculated by adding together, for each month in a given period, the total subscription-related revenues for that particular month divided by the average number of subscribers for that month and then dividing that sum by the total number of months in the period.
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Appendix 4 - Description of Key Line Items
Revenue: Generated from the following services: cable television, broadband internet, DTH-TV, value-added services (such as OTT), telephony subscriptions and telephony usage, content and other sources (primarily related to the sale of end-user equipment). Revenues generated from our bundle subscriptions are allocated to the individual products of standard cable, broadband internet and telephony subscriptions based on the individual product prices for each product as a percentage of the sum of the individual product prices. Revenue for these services is charged and recognised in the period in which these services are provided. We recognise revenues for connection fees upon delivery of installation and we defer and amortise connection fees over the average remaining useful life of the customer relationship. Other income: Arises mainly from the sale of programming rights, advertising and lease of cable network. Content cost: Include author rights and royalties paid to procure our content, and include fees paid to channel providers, primarily related to foreign television channels. Our content fees are predominantly determined on a flat monthly amount and to a lesser extent on a per-subscriber basis. Satellite capacity cost: Relate to the lease of satellite capacity from third-party providers, which currently is EUTELSAT. These costs are impacted by the type and value of commercial discounts obtained from satellite providers. Link and interconnection cost: These costs relate to fees payable in order to transfer data over third-party networks. Internet connection links are leased from various parties. Materials cost: Include costs to procure set-top boxes, other products, such as telephones and routers, and materials used to connect subscribers to our network. Staff costs: Include wages and salaries, social security costs, pension costs and other post-employment benefits and the cost of temporary and external personnel, adjusted for own work capitalized based on direct labour hours spent on projects which are capitalized. Depreciation cost: Depreciation cost relates to the depreciation and impairment of our property, plant and equipment over their useful lives. Amortisation of intangible assets: Relates to the amortization and impairment of our intangible assets over their useful lives. Our intangible assets include our customer base and direct subscriber acquisition costs, which, for our cable and DTH customers, are capitalized and amortized over the estimated useful life of the customer relationship. For our mobile customers, subscriber acquisition costs are capitalized and amortized over a period of twenty-four months (the estimated life of the post-paid customer contract), while our mobile customer base is capitalized and amortized over its estimated useful life. Intangible assets also include goodwill, computer software, licenses and content such as sport rights.
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Other operating expenses: Includes rent of premises, poles and ducts, marketing and promotion expenses, legal and administrative fees and maintenance costs. Finance income: Includes interest income on funds invested (including short-term bank deposits) and foreign currency gains. Finance costs: Include interest expense on borrowings and foreign currency losses. Income tax (expense)/benefit: Comprises current and deferred income tax and is recognized in our statement of comprehensive income, except to the extent that such expense or benefit relates to an item that is recognized as equity in our balance sheet, or in our statement of other comprehensive income. Operating income: Represents the amount of profit generated from business operations, and includes total revenues less total operating expenses (including cost of goods sold, personnel expenses, contracted work, materials and logistics, marketing and sales, office expenses, other operating expenses, amortisation, depreciation and impairments).
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Appendix 5 - Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our income and cash flow from operations are affected by changes in market interest rates. Some items on our balance sheet, such as cash and bank balances, interest bearing investments and borrowings, are exposed to interest rate risk.
Borrowings under the Existing United Group Revolving Credit Facility and the Existing United Group Notes that are floating rate bear interest at varying rates, and as a result we will have interest risk with respect to this debt. Interest rate hedging arrangements are not in place with respect to the debt under our Existing United Group Revolving Credit Facility and such floating rate notes. For fixed rate debt, interest rate changes affect the fair market value of such debt, but do not impact earnings or cash flow.
Currency Risk
As a result of our operations in various countries, we generate a significant portion of our sales and incur a significant portion of our expenses in currencies other than the Euro. Our primary exposure is to the Serbian dinar. In H1 2019, 37% of our revenue was denominated in Serbian dinar and 63% was denominated in euros or other currency. The Bosnia and Herzegovinian mark is pegged to the euro, while Croatian kuna and North Macedonian dinar are relatively stable. In March 2015, we entered into a EUR/USD currency hedge agreement, pursuant to which we hedge our exposure to the U.S. dollar. We entered into an additional EUR/USD currency hedge agreement in May 2016 pursuant to which we hedged the remaining portion of our exposure to the U.S. dollar for the year 2016, and in February 2017, we entered into an additional EUR/USD currency hedge to cover most of our 2017 U.S. dollar exposure. Based on our lack of any additional material exposure to the U.S. dollar in 2018 and 2019, we did not enter into any additional currency hedge agreements during the period ended June 30, 2019.
Translation Risk
Translation risk is the risk that the value in Euro of the consolidated profit and loss statement and balance sheet will fluctuate due to changes in foreign exchange rates connected with the translation of our subsidiaries that do not have the Euro as their functional currency. Since January 1, 2016, almost all our indebtedness has been denominated in Euro.
Transaction Risk
Transaction risk is the risk of exchange losses made by us from purchases and sales in currencies other than the local currency of the subsidiaries concerned.
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Appendix 6 - Critical Accounting Policies
For a description of our critical accounting estimates and judgments, see Note 6 to the Adria MidCo B.V. Group Consolidated Financial Statements as of and for the year ended December 31, 2018. Our significant accounting policies and changes of accounting policies, including IFRS 9 (Financial Instruments), IFRS 15 (Revenue from Contracts with Customers) and IFRS 16 (Leases), are described in Notes 3 and 4 to the Audited Financial Statements.
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